One fundamental change introduced by the PPSA is that knowledge is largely irrelevant to the priority of security interests. There are several exceptions where knowledge is relevant, which are predominantly the first three priority buckets of the priority waterfall in this book.  These are (broadly):

Despite the exceptions listed above, the general rule is that secured parties can register or otherwise perfect
their security interests to defeat other security interests and secured parties they know about but who have either (A) forgotten to perfect, (B) incorrectly perfected, or (C) not perfected in the strongest manner by, for example, taking control of financial assets such as shares and bonds. By contrast, under pre-PPSA law, notice of a prior (say, equitable) interest would often mean that a secured party could not take a subsequent legal (often, registered) interest and “jump the queue” ahead of the existing equitable interest.

The world becomes harsher under the PPSA, but much simpler and more efficient.

This means that when conducting a security review or investigating accountancy role, or otherwise preparing for enforcement of security interests, opportunities are likely to arise. Secured parties may find that other security interests such as leases or retention of title sales (both often PMSIs), may not have registered or perfected in time, or at all, and remain unperfected and vulnerable to defeat.

Some of the potential opportunities for secured parties to improve their priority position are discussed below.

Perfection against collateral others have not perfected against

First, if an existing secured party has a wide security interest such as a perfected security interest over all present and after-acquired property, they may find they receive windfalls from incorrectly perfected PMSIs and other unperfected security interests. The collateral under most security interests that are unperfected will fall back and be swept up by perfected wide security interests upon the administration or liquidation of the grantor. PMSIs are particularly vulnerable to defeat given that they must be registered within strict timeframes – see the PMSI Rules discussed at paragraphs 17.9.1 to 17.9.2 of Chapter 17 (Perfection).

Second, secured parties who would otherwise take narrow security interests against original collateral only (for example, a mortgage over a truck) might assess the merits and possibilities of taking a wider or an all-assets security interest (for example, security over the truck and as many other assets as possible) to sweep up collateral that has not been properly perfected against by other secured parties.

Third, secured parties may wish to consider the possibility and merits of taking new security and perfecting it over collateral they did not previously hold security over, to defeat other secured parties who may be unperfected, or not perfected in the strongest way (control – see below), in respect of that collateral.

Taking a security interest just prior to an insolvency carries the risk of it being a preference or other voidable transaction¹. Further, a circulating security interest (floating charge) granted by a company within 6 months of the relation-back day upon the grantor entering administration or liquidation will be void unless granted for new consideration or advances². Finally, the grantor may have given negative pledge covenants (agreed not to grant further security) in favour of existing secured parties, which require consideration.

In summary, spotting perfection gaps in a security structure may present opportunities, particularly to holders of wide security interests such as all-assets security interests, to jump ahead of security interests which are not perfected, or not perfected in the strongest way.

Perfection by control - jumping the queue

Secured parties who do not currently hold a security interest which attaches to financial assets (shares, bonds, units in managed investment schemes, etc) that can be perfected against by control (see below), should assess their ability to navigate voidable transaction risk and any negative pledge covenants⁶ to take a new security interest over that collateral and perfect by control. The objective is to defeat other (non-transitional) security interests attached to the collateral which may be perfected by registration, possession or temporary perfection only.

Secured parties can perfect their security interests by control over only six (6) classes of collateral, being:

The opportunities to jump ahead of the queue are likely to be limited to where (A) a grantor owns these classes of collateral, and (B) the secured party already holds an all- assets security interest, or can take a new security interest navigating the voidable transaction risk of taking new security prior to the onset of insolvency, and any negative pledge covenants given by the grantor.

Opportunities to perfect by control and “jump the queue” ahead of other perfected security interests (which are not perfected by control) can swell the asset-pie available to a secured party prior to going into an enforcement. These opportunities will be particularly attractive to second and third-ranking secured parties, who have everything to gain. By contrast, first-ranking secured parties will look to defend themselves from being trumped against financial assets by lower-ranking secured parties perfecting by control and defeating them.